A new analysis of San Diego's pension system shows the gap between promised benefits and money to pay them has widened to $2.7 billion, wiping out progress the city made toward shoring up a sagging retirement fund.

The shortfall eclipses the $1.6 billion gap in 2005, at the peak of a city pension crisis that drew national attention. City leaders created the problem by boosting pension benefits in exchange for pension board approval of inadequate funding of the system.

The deficit could require significantly higher city contributions to the pension fund to make up for investment losses, causing much deeper budget cuts than those the City Council took up yesterday. Closures of libraries and recreation centers proposed to cover a $43 million budget deficit sparked a day of emotional public testimony for a council committee.

Mayor Jerry Sanders said he will now ask city labor unions for major concessions, including delaying or scrapping benefits. City Attorney Michael Aguirre said officials should consider bankruptcy for the city or the retirement system.

City actuary Joseph Esuchanko told the council that the amount owed to retirees in coming decades has grown to $6.5 billion as of Oct. 31, while the assets have slid to $3.8 billion.

He said the pension system's liabilities are up nearly $2 billion since 2005, partly because of a decrease in the system's assumed rate of return on investments, a longer retiree life expectancy and public safety pay increases.

Esuchanko noted that pension officials don't use Oct. 31 data to calculate city pension payments, and they will have different calculations because they “smooth out” market spikes by factoring in multiple years of market activity.

The Mayor's Office has estimated that its annual pension payment in July 2009 will be $166 million. But Esuchanko told the council, under questioning from Aguirre, that the amount owed could actually be as high as $251 million.

Aguirre said pension administrators shouldn't count on market gains to boost assets, as they did several years ago.

Pension funding

Amount of San Diego's pension deficit in dollars, and percent of funding requirement met.

Oct. 31, 2008: $2.7 billion,
58 percent funded

June 30, 2008: $2.2 billion,
66 percent

June 30, 2007: $1.2 billion,
79 percent

June 30, 2006: $1.2 billion,
77 percent

June 30, 2005: $1.6 billion,
65 percent

SOURCE: The city's actuary

“You're not going to see some sort of Herculean bounce-back,” he said. “That means we're going to fall further and further behind.”

Sanders framed his comments on the pension system by talking about options to keep it alive.

“We don't exist to fund employee pensions,” Sanders said. “And if the problem gets too large, that's exactly what starts to happen. So we're going to have to start having conversations with our employee unions so we address this together.”

Pension administrator David Wescoe declined to comment on Esuchanko's $2.7 billion estimate, saying retirement officials calculate the figure once a year, on June 30.

“You can't really calculate it seat of the pants,” he said.

He acknowledged, “It's an important discussion for the city to understand the potential of their long-term financial commitments to the pension system.” But he added, “If you're basing that discussion on an October or November number, and there's still seven months to go in the fiscal year, you can reach the wrong conclusion based on the wrong data, and that is counterproductive.”

Aguirre, who will leave office in December when newly elected Jan Goldsmith takes over as city attorney, said San Diego is “hiding the ball,” similar to the way it cloaked a mounting pension deficit from bond investors and the public in 2002 and 2003, leading to sanctions for securities fraud.

“What happened is, we suffered a catastrophic loss and everybody is trying to put a Band-Aid on it,” Aguirre said. “The last thing in the world we want to do is minimize the problem.”

The city's annual pension payment has never exceeded $163 million, even at the peak of its fiscal crisis.

At that time, the pension deficit was reported as $1.4 billion because the system used a different formula to calculate it. Esuchanko has recalculated that shortfall at $1.6 billion to be current with the latest models.

The new five-year financial outlook the Mayor's Office released yesterday shows the annual payment could be $236 million on July 1, 2010, and $256 million a year later. That's in a worst-case scenario.

The city also estimated its costs if financial markets recover more quickly and pension officials take steps to reduce expenses. Under this scenario, the city's pension payment would increase to $199 million July 1, 2010, and $207 million a year later.

By comparison, this year's pension contribution was $161.7 million.

Chief Operating Officer Jay Goldstone told the council why the city chose the rosier picture for “scenario one,” saying, “We're not assuming in our forecast that the market will fully recover. I think that would be foolish. But there is a chance that there would be some recovery.”

The San Diego County Employees Retirement Association fund had a pension deficit of $485 million on June 30. Since then, its investments have lost about $1.1 billion, but a new pension deficit has not been calculated.

Brian White, chief executive of the association, said the fund has experienced double-digit percentage gains over the past four years, which will help it survive the current economic climate.

“These are significant declines, but anticipated ones, given the current difficulties in the financial markets,” he said in a statement. “The markets will recover, and when they do, SDCERA will be well positioned to profit.”